Article 13 - Capital Gains

After giving effect to some preliminary transactions, a U.S. corporation which was a qualifying person for purposes of the Canada-US Treaty (the “Treaty”) wholly-owned four stacked corporations in Country 1. The “bottom” Country 1 corporation, in turn, wholly-owned a resident of Canada (Canco). The shares of Canco and of the above Country 1 corporations were taxable Canadian property (TCP).

The proposed transactions included the US corporation contributing its shares of a Country 1 corporation to a newly-formed wholly-owned US corporation, which is a qualifying person.

CRA ruled that this disposition will be exempted under Art. XIII(4) of the Treaty (presumably, because the transferred TCP was not shares of a company resident in Canada).

A Canadian-resident trust (the “Trust”) will realize a capital gain on a deemed disposition (the “Deemed Disposition”) pursuant to s. 104(4)(b) of the “U.S. Real Property” on its 21st anniversary date. Is the Trust eligible to make an election pursuant to Art. XIII(7) the Canada-U.S. Treaty to elect for U.S. federal income tax purposes, a notional sale and repurchase of the U.S. Real Property to occur in the same year as that of the Deemed Disposition?

The Directorate noted that, in the absence of the election, there could be “unrelieved double taxation” since a disposition in a different year for U.S. purposes could result in insufficient income from U.S. sources for purposes of the s. 126(1) credit in the year of the Deemed Disposition. It then indicated that it considered that it was within the IRS’s jurisdiction and not its jurisdiction to determine whether the trust is eligible to elect pursuant to Art. XIII(7) the Canada-U.S. Treaty to have a notional sale and repurchase of the U.S. real property occur for U.S. purposes in the same year as that of the Deemed Disposition.

Background

Mr. A, who has never been a resident of Canada and is a resident of a redacted country for purposes of Art. 4 of the Treaty with that country, has held vacant land (the “Property”) in Canada for some time through a wholly-owned non-resident corporation (“Holdco”). Holdco acquired the property for investment rather than for development purposes, and the property (which was its sole asset other than some cash) has never generated income.

Proposed transactions

Mr. A will gift the shares of Holdco (which are taxable Canadian property and capital property) equally to his three non-resident children.

Rulings

A. Provided that … Mr. A is regarded as a tax resident of XXXXXXXXXX by virtue of Article 4(1) of the Treaty, the capital gain realized by Mr. A on the disposition of the Holdco shares will not be subject to tax under Part I of the Act pursuant to Article 13(6) of the Treaty and subsection 115(1).

B. Provided that the Children file the notifications required by subsection 116(5.02) in respect of the acquisition of the Holdco shares, such shares will constitute treaty-exempt property, and therefore excluded property, such that Mr. A will not be required to comply with the requirements of subsection 116(3) in respect of the disposition of such shares.

A non-resident individual (the "Non-resident") residing in Hong Kong for the purposes of the Canada-Hong Kong Convention disposed of land located in Canada to an arm's length third party. CRA stated:

[T]he capital gain from the disposition of the Land by the Non-resident is taxable in Canada under Article 13, paragraph 1, of the Convention, whether or not that property has generated property income or business income. Indeed, we understand that the reference to Article 6, "Income from Immovable Property", in Article 13, paragraph 1, of the Convention does not have the effect of reducing the scope of that paragraph. Finally, we are of the view that paragraph 22 of the OECD Commentary on Article 13 of the Model Tax Convention on Income and on Capital supports our conclusion since it specifies that, for purposes of the definition of immovable property, paragraph 1 of Article 13 refers to Article 6.

If a U.K. resident disposes of shares of its Canadian subsidiary that derive the greater part of their value from rights related to an active oil and gas business, is the gain on the disposition exempted under para. 7? After referring to the status of such shares as “taxable Canadian property”, and noting that under Art.13, para. 5(a), shares may be taxed in Canada if they derive the greater part of their value from immovable property situated in Canada, OR “any right referred to in paragraph 4 of Article 13 of the Convention, which describes certain rights related to petroleum, natural gas, or other related hydrocarbons situated in Canada,” CRA stated:

Assuming that the shares of the Canadian subsidiary (which carries on an active oil and gas business) derive the greater part of their value from rights described in paragraph 4 of Article 13 of the Convention, then Canada retains its right to tax the gain on the alienation of those shares. It is not necessary to determine whether the shares derive their value from immovable property as defined in the Convention or the Income Tax Conventions Interpretation Act.

A Netherlands corporation (BVCo) holds 1/3 of its assets as shares of an Australian subsidiary (“AusCo”), whose Australian real estate assets represent 5/6 of the consolidated assets, but also with high liabilities, and holds 2/3 of its assets as shares of a Canadian subsidiary (“TCPCo”) whose Canadian real estate assets represent 1/6 of the consolidated assets, but with low leverage. In determining whether the shares of BVCo are taxable Canadian property, CRA would first apply the “gross asset value method” to determine that 100% and 0% of the gross assets of TCPCo and AusCo, respectively, are taxable Canadian property (“TCP”). Next, it would apply the “proportionate value approach” to multiply such percentages by the FMV of the shares of TCPCo and AusCo to conclude that 2/3 of the FMV of the BVCo shares was derived from TCP, so that the BVCo shares were themselves TCP.

CRA concluded that the same methodology should also be applied in determining that more than 50% of the value of the shares of BVCo held by a UK company were derived from Canadian immovable property, so that those shares would not be exempted in the UK company’s hands under the Canada-UK Treaty. CRA stated:

[T]he methodology to determine the portion of the value of a company’s shares that is derived directly or indirectly from immovable property situated in Canada for the purpose of the Treaty is the same as it is for the purpose of the definition of TCP…[t]hat is, the gross asset value method at the entity level with the proportionate value approach being used to determine the FMV of the shares of a subsidiary derived from relevant Canadian property for the purpose of applying the gross asset value method at the parent level.

A resident of Germany will gift her shares, each qualifying as a “share of the capital stock of a family farm or fishing corporation” under s. 70(10), to her Canadian-resident son who, along with his father, will be actively engaged, on a regular and continuous basis, in carrying on the corporation’s grain farming business in Canada. What procedures would apply under s. 116?

After noting that the shares were taxable Canadian property and before addressing such procedures, CRA stated:

[T]he value of the Shares would be principally derived from immovable property (i.e., real property that is farmland) situated in Canada. However, the farmland would be property in which the business is carried on and as such, it would be excluded from the term “immovable property” for purposes of paragraph 4 of Article 13 of the [Canada-Germany] Treaty.

Are shares or trust interests in a resident corporation or trust considered to derive their value principally from real property situated in Canada for purposes of Art. XIII(3)(b) of the Canada–U.S. Treaty where at the time of the disposition the corporation or trust only held cash proceeds from the disposition of Canadian real property?

As a preliminary observation, CRA stated:

In the context of a tax treaty between Canada and another jurisdiction, as well as in the context of the definition of the term “taxable Canadian property” in subsection 248(1) of the Act, the use of the phrase “derived principally from real property” (or a similar expression) allows one to look through a particular property (which is, for example, a share of a corporation or an interest in a trust) to the real property situated in Canada and held, directly or indirectly, by such corporation or trust.

and then responded:

[A]s long as the corporation or the trust do not hold real property situated in Canada (either directly or indirectly) at the relevant time, the value of the shares of the corporation or the interest in the trust cannot be said to be derived from such real property for purposes of Article XIII….

[I]f the real property was disposed of by the corporation or the trust at any time during the 60 months preceding the disposition of the shares of the corporation or the interest in the trust, such shares or the interest, respectively, would still be considered taxable Canadian property….

Current structure

Foreign Parent, an Israeli public company, holds its LP interest in LP through a Canadian subsidiary (Canco1) and holds its GP interest through a Canadian subsidiary (Canco1) of an immediate Israeli subsidiary (Foreign Holdco) of Foreign Parent. LP's only asset is shares of Pubco, a Canadian public company whose assets consist principally of Canadian real estate. Canco1 and Canco2 also hold Pubco shares.

Proposed transactions

In order to simplify the structure: Foreign Parent will acquire from Foreign Holdco for no consideration the shares of Canco2; and Canco2 will purchase all the shares of Canco1 from Foreign Parent in exchange for Canco2 common shares with an equivalent fair market value, but with their paid-up capital limited by s. 212.1.

Ruling

that any gains on these dispositions will be exempt under Art. XIII, para. 4 of the Canada-Israel Treaty. Art. XIII, para. 3 provided that "gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in [Canada], may be taxed in [Canada]." The summary stated:

The property of the Canadian corporation the shares of which are being disposed of cannot be said to consist principally of immovable property situated in Canada and therefore, the gain does not meet the requirements of paragraph 3 of Article XIII… .

Paragraph 4 of the Canada-Japan Treaty states that "Gains derived by a resident of a Contracting State from the alienation of any property other than that referred in paragraphs 1 to 3 and arising in the other Contracting State may be taxed in that other Contracting State". Would a gain be considered to arise where the property (which is taxable Canadian property) is located (Canada) or where the transaction is completed (in Japan)? CRA responded:

Pursuant to paragraph 6.3 of the Income Tax Convention Interpretation Act (Canada) (the "ITCIA"), except where a convention expressly otherwise provides, a gain from the disposition of TCP is deemed to arise in Canada. … [T]here is nothing in the Treaty that expressly provides where a gain described in paragraph 4 of Article 13 arises. Therefore, if the gain pertains to the disposition of TCP, it would be deemed by paragraph 6.3 of the ITCIA to arise in Canada even if the sale took place in Japan and paragraph 4 of Article 13 of the Treaty would permit Canada the right to tax such gain.

An individual resident in Canada, who held the bare ownership of French immovable property, disposed of the property at a gain. France was permitted by Art. XIII, para. 1(a) of the France-Canada Convention to tax the gain, which did not trench on the right of Canada to also tax the gain under ITA .s 2(1), although on the satisfaction of certain conditions, a foreign tax credit would be available.

Following a preliminary reorganization (including an amalgamation of predecessors of Amalco so as to "consolidate the tax attributes"), all the shares of Amalco are held by Foreignco3 (resident in the U.S.) which, in turn, is an indirect wholly-owned subsidiary of Foreign Parent, a listed company. Amalco has various direct or indirect (mostly Canadian) subsidiaries carrying on the XYZ Business and also holds the "Keep Assets," which mostly are non-resident or resident subsidiaries. The following transactions occur in order to accomplish an indirect sale of the XYZ Business by Foreignco3 to Buyer (an arm's length purchaser) after a spin-off of the other "Keep Assets" to a newly-incorporated Canadian spinco whose initial common share is held by Foreignco3 ("Canco"):

1. On a s. 86 reorganization Foreignco3 will receive "Keep Shares" (non-voting redeemable retractable preferred shares) and New Common Shares in exchange for its old common shares of Amalco (which are taxable Canadian property).
2. Foreignco3 will transfer the Keep Shares to Canco in exchange for additional Canco Shares, electing under s. 85(1) at fair market value.
3. Amalco will transfer the Keep Assets to Canco in exchange for the Canco Note and the assumption of the Assumed Debts, with a net taxable capital gain resulting.
4. Amalco will purchase the Keep Shares from Canco for cancellation (giving rise to an obligation, but with no note issued).
5. The obligations arising in 3 and 4 and other obligations are set-off.
6. Foreignco3 will sell the New Common Shares (which now derive their value from the XYZ Assets) to the Buyer for cash.

Rulings include:

• the gain realized by Foreignco3 on the transfer of the Keep Shares to Canco in 2 and on the sale in 6 will be exempt from tax under Art. 13 of the Treaty.
• 55(2) will not apply to the deemed dividends arising in 4.

A non-resident corporation (Vendor) disposed at a gain of shares of Canco, which held partnership interests in two Quebec real estate partnerships (an SEC and SENC). Vendor applied for a s. 116 certificate and submitted that the gain was exempt under Art. XIII, para. 4 of the Canada-Singapore Convention, on the basis that para. 3 did not apply, which refers to:

gains from the alienation of shares of a company, or of an interest in a partnership or a trust, the property of which consists principally of immovable property… .

In finding that the gain was not Treaty-exempted, CRA stated (TaxInterpretations translation):

In general, an interest in a Canadian partnershp is not an immovable property, even if the value of its property is principally derived from immovable property. ..[T]hus...the interests of Canco in SEC and SENC cannot be considered as immovable property… .

[T]he better position…is to consider that SEC and SENC are not distinct persons for purposes of the Convention and that their respective patrimonies can be assimilated to that of their members. Consequently, the Canadian immovable properties which are held by means of SEC and SENC should be considered as being directly held by Canco to the extent of its interests in them. ..

It should also be noted that the presumption provided for in paragraph 96(1)(a)...applies only for the purposes set out in its preamble... .

A U.S. resident owned vacant land in Canada from before September 26, 1980 and after that date built a cottage thereon. CRA found:

If the cottage is substantially connected to the land and permanently improves the land, then it is our view that the cottage constructed on the property is a fixture and becomes part of the land on which it is situated.

Accordingly, the total gain (including that attributable to the building) on a subsequent disposition would be eligible for reduction under Art. XIII, para. 9 of the Canada- U.S. Treaty, and only one notification would be required under s. 116. As the building was personal-use property rather than depreciable property, Reg. 1102(2) (excluding land upon which depreciable property is situated from depreciable property) was not relevant.

A partnership (Foreign Partnership), whose non-resident members (Investors) are resident in Foreign Countries 1 through 5, uses a portion of its cash from unit and loan subscriptions to subscribe for equity of a Newco resident in Foreign Country 6 (Foreign Parent), and applies the balance of its subscription cash to subscribe for a mixture of profit-participating loans and non-interest-bearing loans of Foreign Parent (the Foreign Parent Loans). Foreign Parent, in turn, uses such cash proceeds to subscribe for shares of another Newco (Foreign Subsidiary), also resident in Foreign Country 6 and to subscribe for interest-bearing loans of Foreign Subsidiary (the Foreign Subsidiary Loans). Foreign Subsidiary, in turn, uses such cash proceeds to acquire partnership interests in a partnership (Canadian Partnership) holding Canadian real property.

Rulings:

• Each Investor's interest in the Foreign Partnership will be taxable Canadian property
• Such interest will be treaty-protected property for Investors resident in Foreign Countries 1 through 4 provided stipulated conditions relevant to the applicable Treaty are satisfied, as follows:
• Treaty 1 - the only properties of the Foreign Partnership are the shares of Foreign Parent, the Foreign Parent Loans and the Foreign Subsidiary Loans
• Treaty 2 – the Investor does not have a controlling interest, (a controlling interest being where the Investor and persons related to the Investor have an interest of 50% or more), in the Foreign Partnership
• Treaty 3 – no additional conditions
• Treaty 4 - the Investor and any persons related to or connected with the Investor are entitled to an interest of less than 10% of the income and capital of the Foreign Partnership immediately before the Disposition Time
• Treaty 5 - not treaty-protected property

After the questioner referenced the previous position that, in the context of Treaty references to shares deriving in their value principally from real property, CRA would accept a valuation method that assigned the debt of a company to the assets to which the debt reasonably related, CRA stated:

In the context of tax treaties...the determination whether a share of a company derives its value principally from real or immovable property situated in Canada should be made by reference to the value of the properties of the company without taking into account its debts or other liabilities. This approach is in line with paragraph 28.4 of the [OECD] Commentary....[T]his new more restrictive position will initially be applied only with respect to dispositions of properties that are acquired after 2011.

In responding to a query which noted that the Canada-U.S. Treaty, unlike other Conventions, specifically referred to deferral agreements of competent authorities being entered into to avoid double taxation, and asked whether "the Canadian Competent Authority [would] be willing to enter into a deferral agreement under one of these other treaties where the profit, gain or income is exempted or excluded from taxation under the domestic laws of the residence," CRA responded negatively:

...the Canadian Competent Authority requires taxpayers seeking a deferral agreement to demonstrate that the profit, gain or income for which an agreement is being sought is only deferred - not exempted or excluded - from taxation under the domestic laws of the residence state.

More specifically, CRA noted that the conditions respecting a deferral application under the U.S. Treaty in paras. 76-85 of Information Circular 71-17R5 are "equally applicable to all requests made under the deferral provisions in any of Canada's tax treaties."

The definition in Art. XIII of the Canada-US Convention of "real property situated in the other Contracting State" includes, in the case of real property siuated in Canada "a share of the capital stock of a company that is a resident of Canada, the value of whose shares is derived principally from real property situated in Canada;" and Art. III, para. 2 provides subject to certain exceptions that otherwise undefined terms have the meaning which they have under the law of the State whose taxes are concerned.

Before concluding that the reference in this Art. XIII definition does not include "an option in respect of the share even where the share, itself, is [taxable Canadian property]," CRA stated:

Under the current Act there is no longer a provision that is equivalent to former subsection 115(3). The former provision deemed a share to include an option in respect of the share. By virtue of paragraph 2 of Article III we were able to reach the conclusion that a share for the purpose of subparagraph 3(b)(ii) of the Treaty also included an option therein. With the consolidation of the definition of taxable Canadian property ("TCP") under subsection 248(1) of the Act, an option in a share is no longer defined or deemed to be a share for purposes of the Act. An option in a share where, among other things, more than 50% of the share's value is derived from real property is included in the definition of TCP but is treated as a separate property. Although the option may be TCP it is not considered a "share".

Ruling that the transfer of shares of a UK company (Forco2 - whose value is derived from CAnco shares) by two other UK companies (Forco1 and Forco4) would be exempt under Art. XIII, para. 8 of the Canada-UK Convention on the basis of an internal estimate prepared by Canco management that the going concern value of the gas storage business carried on by Canco (which was carried on in real estate facilities held on leased land) was greater than X% of the value of the shares of Canco, and that the hydrocarbon assets of Canco did not exceed Y% of the assets of Canco.

The shares of a U.S. corporation (D Co) holding two Canadian subsidiaries (G Co and H Co) whose shares are taxable Canadian property are contributed by its U.S.-resident parent (B Co) to a U.S. affiliate. Ruling that "although there will be a disposition of the D Co shares when B Co contributes them to C Co, any gain on this disposition will be exempt from tax in Canada under Article XIII(4) of the Treaty."

"Real property would not be considered rental property for purposes of Article 13(4) of the [Canada-Germany] Treaty unless the property was subject to a lease agreement that created a landlord/tenant relationship ... It is our view that a full-service motel would not normally constitute a rental property ...".

An "approved stock exchange" in Article 13 of the Luxembourg and Netherlands Conventions meant a stock exchanged prescribed for purposes of the Income Tax Act.

Although in most cases comparing gross asset values will be the simpler (and perhaps quite often the most reasonable) method for making the 50 percent determination respecting whether a share derives its value principally from Canadian real property, depending on the facts and circumstances of a particular situation other valuation methods such as the net asset value method may be appropriate. This flexibility generally will be an advantage to the taxpayer except where questionable transactions are occurring.

After referring to Bromley v. Tryon, [1952] AC 265 (HL) ("'greater part' means anything over one-half"), CCRA stated that:

"The term 'value or the greater part of their value' as used in paragraph 5(a) of Article 13 of the [Canada-U.K.] Convention generally requires that more than 50% of the value of the shares being alienated be derived from immovable property or a right referred to in paragraph 4 of Article 13 in order for paragraph 5(a) to apply."

A U.S. resident subsequently disposes of shares, which were taxable Canadian property, received on a s. 87(1) amalgamation in exchange for shares that had been subject to a deemed disposition pursuant to s. 128.1(4)(b) when that taxpayer had ceased to be a Canadian resident. CCRA stated:

Where paragraphs 1, 2 and 3 of Article XIII of the [Canada-US] Convention do not apply … paragraph 5 of Article XIII of the Convention may apply to a U.S. resident who disposes of property acquired on an amalgamation referred to in subsection 87(1) of the Act, even if that property replaces property that was the subject of a deemed disposition pursuant to paragraph 128.1(4)(b) of the Act when that taxpayer ceased to be resident in Canada.

The exception for real property in which the business of the enterprises carried on apparently was viewed as being available where the shares of a private corporation resident in Canada actively carried on a farming business in Canada.

A disposition by a Netherlands resident of shares of a Canadian corporation (perhaps a Canadian holding company holding a Canadian oil and gas operating subsidiary) qualified for exemption under the Netherlands Treaty having regard to the exclusion from immovable property for property (other than rental property) in which the business of the company was carried on given that the operating company was using its oil and gas properties in its Canadian business. The CRA summary states that this "exception applies on a look-through basis."

Where an individual resident of the U.K. owns all the shares of a private Canadian corporation that, in turn, has as its principal asset less than 1% of the shares of a real estate company that is publicly traded on The Toronto Stock Exchange, the exclusion for shares deriving their value "indirectly" from Canadian real estate would apply to a disposition of the shares of the private company even though a direct sale of the shares of the public corporation would be exempt from Canadian capital gains tax.

Where an individual resident of Canada moves to the United States in 1994 and becomes a resident of the United States at that time for treaty purposes under the "tiebreaker" rule, a subsequent disposition of personal property by him under s. 128.1(4)(b) as a result of ceasing to be resident for Canadian purposes will be exempt under Article XIII, paragraph 4, of the Canada-U.S. Convention.

Canada has the right to tax gains of a taxpayer from the deemed disposition of real property situate in Israel as a result of the taxpayer ceasing to be resident in Canada. "the word 'alienation' ... includes deemed disposition referred to in paragraph 128.8(4)(b) ...".

A gain realized by the disposition by a U.S. resident of an interest in a partnership the value of which is not derived principally from real property situated in Canada will be exempt under paragraph 5 of Article XIII of the U.S. Convention.

Where a corporation resident in Israel alienates shares of a corporation resident in Canada the only assets of which are shares of a second Canadian corporation, paragraph 3 of Article XIII of the Canada-Israel Income Tax Convention generally will not be applicable, and by virtue of paragraph 4 of that Article, the Israeli corporation will not be liable to taxation in Canada on the gain notwithstanding that the property of the second Canadian corporation consists principally of immovable property situated in Canada.

In considering where a gain from the alienation of shares would be considered to "arise" for purposes of paragraph 4 of Article XIII of the Canada-Japan Convention, RC would generally not look to the situs of the underlying assets of the corporation but rather would look to the location of the sale of the shares (i.e., usually where the contract is signed)".

The word "gains" in article XIII of the Canada-U.S. Convention means capital gains.

"Property... in which Business of Co. Carried on"): Respecting the exclusion in Article XIII, paragraph 4 of the Canada-Netherlands Convention for property (other than rental property) in which the business of the company is carried on, RC stated that in its view "Oil & Gas reserves and royalty interests will be excluded from the definition of immovable property ... if the owner is actively engaged in the exploitation of natural resources and if such assets are actively exploited or kept for future exploitation by such owner ... . [A]s a general rule, in order for a company to be 'actively engaged' in the exploitation of natural resources, the company must be directly involved in the management and daily activities of the exploitation process on a regular, continuous and substantial basis, and the company's employees must devote time, work and energy to the exploitation. We contrast this with a passive investor or an investor who is in the business of buying and selling working interests or royalties for speculation purposes without being directly involved in the exploitation of the underlying reserves."

Capital gains realized by a U.K. shareholder on the alienation of shares of a Canadian public corporation and whose shares derived most of their value from Canadian real estate will be exempt, provided that the proceeds of disposition are remitted to or received in the U.K., as required in Article XXVII of the U.K-Canada Convention.

A resident of Ireland is subject to tax of 15% on the disposition of shares that are taxable Canadian property in light of Article VI of the Canada-Ireland Convention.

"The reference in paragraph 3 of Article XIII [of the Canada-U.S. Convention] to 'a share of the capital stock of a company, the value of whose shares is derived principally from real property situated in Canada' includes an option in respect of such a share."

Given that paragraph 5 of Article 13 of the Canada-U.K. Convention is to be applied on a look-through basis, subparagraph 7(b) of Article 13 also should be applied on the same look-through basis.

A resident of the U.K. will be granted relief from Canadian tax under Article 13, paragraph 8 of the Canada-U.K. Convention on the deemed disposition by her of taxable Canadian property on her death notwithstanding that no income tax will be payable at that time in the U.K. Paragraph 2 of Article 27 of the Canada-U.K. Convention will not apply because capital gains arising from a deemed disposition on death are not gains that can remitted or received as referred to in that provision.

A U.K. citizen who is resident in Canada for 20 years, then resident in the U.K. for seven years, before he sells a U.K. real property in respect of which he had made an election under s. 48(1)(c) upon ceasing to be a resident in Canada, will be exempt from tax on the disposition pursuant to Article XIII(8). Article XIII(9) will not apply.

With respect to the exclusion in paragraph 7 of Article XIII of the Canada-U.K. Convention for property (other than real property) in which the business of the company is carried on, RC is of the view that: rental property means property rented by the company as landlord/lessor; office buildings, factories, processing plants and fixed machinery and equipment operated by the company together with the land under or subjacent thereto and necessary for use thereof qualify; and oil and gas reserves, mines and well interests qualify if the owner is actively engaged in the exploitation of natural resources subject to the exception relating to hydrocarbons contained in the Convention; and that immovable property that is inventory or property not used in the business but held as an investment for capital gains, will not qualify.

Where a property drops in value after 1984 and then recovers before the date of its disposition, the availability of any transitional relief in paragraph 9 of Article XIII of the Canada-U.S. Convention should be discussed with the competent authority.

The acquisition of a depreciable property on a partial (1/2 step-up basis) under former s. 70(5)(b) would be regarded as a non-recognition transaction for the purposes of paragraph 9.

The gain realized by a U.S. resident who sells an interest in a U.S. partnership which conducts a manufacturing business in Canada and does not own Canadian real estate, will not be taxable in Canada. Article XIII(2) of the U.S. Convention will not apply because the property sold is a partnership interest rather than the property used in the Canadian business.

An individual is resident of Canada for 15 years or more (paragraph 9) if he is a resident of Canada for discrete periods aggregating 15 years and each consisting of at least 12 consecutive months. Years of deemed residence under s. 250(1) also are included, unless the tie-breaker rule in Article IV alters this result.